Question

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.59 a share. The following dividends will be $.64, $.79, and $1.09 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.9 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 13 percent? Multiple Choice $9.87 $12.45 $2.47 $13.04 $12.93

Answer 1

$9.87

Step-by-step explanation:

The first step is to find the present value of the dividend in the first stage

Present value can be found using a financial calculator

D1 = $.59

D2 = $.64

D3 = $.79

D4 = $1.09

I = 13%

Present value = $2.24

value in the stage of indefinite growth = $1.09(1.039) / (0.13 - 0.039) = 1.132510 / 0.091 = 12.45

Present vale of the stage of indefinite growth = 12.45 / 1.13^4 = 7.64

$7.64 + $2.24 = $9.87

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute